Mortgage Insurance for Two-year Operating Loss Loans: Section 223(d)

Summary:
Section 223(d) insures two-year operating loss loans that covers operating losses during the first 2 years after completion (or any other 2-year period within the first 10 years after completion) of multifamily projects with a HUD-insured first mortgage.

Purpose:
Section 223(d) helps avoid insurance claims on HUD-insured multifamily mortgages by insuring separate loans to cover operating losses.

Type of Assistance:
FHA mortgage insurance for HUD-approved lenders.

Eligible Activities:
This program offers insurance for operating loss loans on projects whose first mortgage is insured by HUD. HUD insures loans to cover excess expenses over project gross income incurred during the first two years following the date of project completion. The loan amount, terms, and conditions are prescribed by HUD. HUD may also provide an operating loss loan during any period of consecutive months (not exceeding 24 months) in the first 10 years after the date of project completion. A project can receive both loans but not for same two year period. HUD insures the loan under the same section as the original mortgage in an amount not exceeding the excess of operating expenses over project income. The loan term is limited to the unexpired term of the original mortgage. This program requires appropriated credit subsidy, which is limited.

Eligible Borrowers:
Owners of multifamily projects or facilities subject to a mortgage insured by HUD
are eligible to apply.

Application:
The sponsor has a pre-application conference with the local HUD Multifamily Hub or Program Center to determine preliminary feasibility. The sponsor submits a formal application through a HUD-approved lender to the Multifamily Hub or Program Center where the loan will be processed. Information submitted by the applicant will be reviewed and a determination will be made as to the maximum insurable loan amount. Applications must be made within 3 years after the end of the 2-year operating loss period for the 2-year loan. If program requirements are met, the Multifamily Hub or Program Center will issue a commitment to the lender for mortgage insurance.

Technical Guidance:
This program is authorized by Section 223(d) (12 U.S.C. 1715n) of the National Housing Act 1937, as amended; Public Law 90-448, as amended; and Public Law 91-152, 12 U.S.C. 1715x. Program regulations are found in 24 CFR 207.4(f). The basic program instructions are in HUD Handbook " Mortgage Credit Analysis for Project Mortgage Insurance " 4470.1, Rev-2. (Chapter 17) available on HUDclips. The program is administered by the Office of Multifamily Housing Development.

Program Accomplishments:
In fiscal year 2008, the Department insured mortgages for one operating loss loans for an nursing homes, totaling 165 beds/units for $4.4 million.